The most extraordinary thing about Canadian real estate is how it has shrugged off rule change after rule change in the mortgage market. The June 2021 Mortgages Rule change is not the first and will not be the last that will see for the years to come.
Over the years, we’ve seen the government and the central bank impose over 60 housing financial restrictions since 2008, the height of the global credit crisis. These policies shrank the number of qualified borrowers and inflated mortgage costs. And yet, rather than a collapse, the market has rallied and is up 64% since the changes began.
In their latest attempt to slow the housing market, on June 1st, 2021 the federal government implemented yet another change, that all borrowers regardless of their down payment, would have to qualify at their mortgage rate +2% or 5.25% whichever is greater.
Furthermore, buyers with a 5-19% down payment will now only be able to use 39% of their monthly income to qualify for a mortgage. Homebuyers with 20% or greater down payment can increase this up to 44% of their monthly income, and in some cases, many Class A lenders are extending this to as much as 49%. This change is designed to make purchasing a home at a high price harder for some first-time homebuyers, protecting them against over-extending and slow price increases.
Change in mortgages Rules Jun 01, 2021
- Homebuyers will need at least a credit score of 680. This is 80 points up from the previous requirement of 600. If a couple is buying a home, one of the applicants must have a credit score of at least 680.
- The maximum gross debt ratio (GDS) is limited to 35% (down from 39%) and the maximum total debt service ratio (TDS) is now 42% (down from 44%).
- Effectively, you will need to show that a smaller percentage of your income is required to pay off your debts.
- Borrowed funds will no longer count towards your down payment or count as equity when considerations are being made for your mortgage default insurance.
So, what does this mean to you?
What the new rules mean is that if you are applying for an uninsured mortgage will need to pass a tougher stress test and show a lender that your income supports a mortgage loan at the offered rate plus 2% or 5.25%, whichever is higher.
As an example, a family with an annual income of $100,000, a 20 percent down payment and a five-year fixed mortgage rate of 1.78 percent amortized over 30 years would qualify for a home valued at $651,000 under the previous 4.79 percent qualifying rate. Under the new stress test rate of 5.25 percent, that family’s maximum affordability would decrease to $618,000.
Based on this you can see that the new rules could reduce a person’s maximum buying power by about four to five percent, which is somewhat significant but probably not a game-changer. The new rules are intended to cool the market, in hopes of making homes more affordable.
There is a great deal of speculation as to whether this new mortgage rule will help dampen the current frenzy in the real estate market. Experts are estimating that this move will lower a homebuyer’s purchasing power by approximately 4% to 5%, especially, the first-time homebuyer. While this may not lead to a large impact in the short term, it is expected to have a more significant impact when this is combined with potential increases in interest rates.
Whether you are a first-time home buyer overwhelmed by the changes or an investor curious to see what the next move is, let us help. We can answer any questions you may have, and we can help you navigate through the process.
BPF Solutions is a boutique consulting and advisory firm, helping people seeking financing for over 30 years. Our team of professionals can help you with all your residential and commercial real estate purchases or refinancing needs. Our long‐term relationships with lenders and other market intermediaries ensure, you get the best RATE and can close your deal in a timely fashion.